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Glenmark: On the path to stronger growth - Views on News from Equitymaster

Glenmark: On the path to stronger growth

Jun 23, 2010

Glenmark has announced its FY10 results. The company has reported 18% YoY and 71% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary

Revenues grow by 18% YoY during FY10 led by the specialty business which grows by 28% YoY.

EBDITA margins improve by 2.9% due to lower staff costs and other expenditure (as percentage of sales).

Bottomline grows by 71% YoY due to extraordinary expenses of Rs 1.2 bn in FY09, which were not present in FY10. Excluding the same, bottomline grows by 7% YoY.

Financial performance: Consolidated snapshot

(Rs m)

4QFY09

4QFY10

Change

FY09

FY10

Change

Net sales

5,158

7,125

38.1%

21,215

25,121

18.4%

Expenditure

5,343

5,308

-0.7%

16,380

18,653

13.9%

Operating profit (EBIDTA)

(186)

1,817

4,835

6,468

33.8%

Operating profit margin (%)

-3.6%

25.5%

22.8%

25.7%

Other income

847

38

-95.5%

1,455

217

-85.1%

Interest

719

378

-47.5%

1,405

1,640

16.8%

Depreciation

296

169

-42.9%

1,027

1,206

17.5%

Profit before tax

(354)

1,308

-469.8%

3,858

3,839

-0.5%

Extraordinary item

(1,170)

(1,170)

-

Tax

(316)

282

-189.1%

754

529

-29.9%

Profit after tax/ (loss)

(1,207)

1,026

1,935

3,310

71.1%

Net profit margin (%)

-23.4%

14.4%

9.1%

13.2%

No. of shares (m)

250.5

269.8

Diluted earnings per share (Rs)

12.3

P/E ratio (x)

22.7

What has driven performance in FY10?

Glenmark’s overall revenues grew by 18% YoY during the year led by the speciality business which grew by 28% YoY (excluding the out-licensing revenues). As far as the speciality business is concerned, in Latin America (excluding Argentina), sales fell by 14% YoY mainly on account of restructuring of operations in Brazil which now have been concluded. Europe, however, posted an impressive performance with sales growing by 37% YoY led by product launches in Czech Republic, Slovakia and Romania. India also did well to log in a growth rate of 23% YoY due to strong performance of its power brands and new product launches during the year. Semi-regulated markets also did very well to grow by a healthy 64% YoY. Most of this strong growth came about in the fourth quarter of the year. Overall, barring Latin America, all other businesses contributed to the growth of the specialty business during the year.

Consolidated business snapshot

(Rs m)

4QFY09

4QFY10

Change

FY09

FY10

Change

Generics business

US

1,563

1,852

18.5%

7,338

7,230

-1.5%

Latin America (Argentina)

76

80

5.5%

400

343

-14.3%

Europe

74

98

32.0%

147

299

103.7%

API

505

703

39.1%

1,972

2,627

33.2%

Total generics business (i)

2,219

2,733

23.2%

9,857

10,500

6.5%

Speciality business

Latin America (Brazil & others)

269

346

28.7%

1,580

1,361

-13.9%

Semi reulated markets (SRM)

423

1,370

223.9%

2,355

3,864

64.1%

Europe

384

459

19.7%

996

1,363

36.8%

India

1,617

2,184

35.1%

6,142

7,529

22.6%

Total speciality business (ii)

2,692

4,359

61.9%

11,073

14,116

27.5%

Out-licensing revenue (iii)

-

-

-

232

Total (i+ii+iii)

4,911

7,091

44.4%

20,930

24,849

18.7%

Revenues from the generics business failed to impress growing by a tepid 6.5% YoY during the year. Revenues from the US declined by 2% YoY. Having said that, during the year, Glenmark received 16 ANDA approvals (including 6 tentative approvals), which is an encouraging sign, given the delay in approvals that the company had to contend with especially in the previous fiscal. Also, the company now has 53 products in the market and 50 ANDAs in various stages of approval with the US FDA. Further, out of the total 11 potential FTF Para IV applications filed by the company, Glenmark is the sole first filer on 4 products. These 4 products together had sales of around US$ 1.6 bn as on March 2010. While the oncology business in Argentina declined by 14% YoY, APIs recorded strong sales growth of 33% YoY and thus supported the growth in overall sales from the generics business.

Operating margins improved by 2.9% during FY10 largely due to lower staff costs and other expenditure (as percentage of sales). As a result, operating profits grew by a healthy 34% YoY during the year. Glenmark’s bottomline grew a robust 71% YoY largely due to extraordinary expenses of Rs 1.2 bn incurred in FY09, which were not present this year. Thus, on excluding the same, growth in the bottomline was subdued at 7% YoY. This growth was much lower than the growth in operating profits primarily due to the 85% YoY reduction in other income.

What to expect?

At the current price of Rs 279, the stock is trading at 10.4 times our estimated FY13 earnings. Most of Glenmark’s businesses started performing well in 4QFY10, which is an encouraging sign as it highlights the fact that the business environment is improving. The company’s interest costs are high currently due to debt of Rs 17 bn on its books. The cash generated from the improved performance of its business will go towards paying off this debt. Besides this, the company has filed a draft prospectus with the SEBI for listing Glenmark Generics and part of the proceeds from this listing will also be used to retire debt.

On the R&D front, the company continues to be in talks with global pharma majors to garner some out-licensing deals. The fact that the company was able to bag such a deal with Medicis Pharmaceuticals USA is an encouraging sign. We maintain our positive view on the stock from a long term perspective.

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